Farmers Face Increasing Cost-Price Squeeze in 2006

Farm production expenses that increased $28 billion in the last three years will jump another $7 billion in 2006 according to new FAPRI report. Compiled by staff

Published on: Mar 7, 2006

U.S. farmers face an increasing cost-price squeeze in the year ahead, according to economists from the University of Missouri-Columbia. Farm production expenses that increased $28 billion in the last three years will jump another $7 billion in 2006.

Rising energy prices, which include fuel and fertilizer, account for $10 billion of the increase since 2002.

"Costs also increased substantially for feed, purchased livestock, seed, repairs, and interest payments," according to a 10-year baseline report released to the U.S. Congress by the Food and Agricultural Policy Research Institute.

The report shows net farm income falling in 2006 by $16.8 billion from 2005. Both increased costs and falling crop and livestock receipts squeeze farm profits.

Further income declines are projected for 2007, with a slight upturn in income through 2015. Net farm income is projected at $56 billion in 2006, $52 billion in 2007 and $58 billion by baseline end.

Farmers face declining payments from federal farm programs throughout the baseline. Payments peaked at $23 billion in 2005 and are projected at $13 billion in 2015.

The FAPRI baseline will be used to analyze proposed changes in the farm bill to be rewritten by Congress by 2007.

The 2006 baseline includes provisions of the Deficit Reduction Act passed earlier this year. "The Act cuts direct payments available to farmers before planting in 2007 from 50% to 22% of the total annual payment," says Pat Westhoff, FAPRI policy analyst. "This does not affect what producers will get in total, but does affect when they receive their payments."

The baseline contains good news for grocery shoppers. The price of food increases at a slower rate of inflation than in the Consumer Price Index. Food inflation grew at 2.4% in 2005, with a projected increase of 2% or less each year in the 10-year outlook.

Prices of meat contribute most to the slowing of the CPI for food.

In the crop outlook, record high stockpiles of corn, soybeans, and wheat keep a lid on crop prices this year. Back-to-back record soybean yields in 2004 and 2005 helped replenish world soybean supplies. "If yields return to normal trend in 2006, soybean production is likely to decline," Westhoff says. "However large beginning stocks could lead to record total supplies." Soybean prices that averaged $7.34 per bushel in 2003-04 are projected at $5.41 in 2005-06 and $5.02 in 2006-07.

Wheat prices remain stable at, or slightly under, $3.40 per bushel for the next three years. Harvested wheat acreage is expected to decline, particularly in the dry Southern Plains.

"While modest recovery in net returns is seen for wheat, that will not likely discourage further reduction in wheat acreage," Westhoff says. Increasing demand for corn is expected to draw wheat ground into corn production.

Corn growers had record production in 2004 and the crop in 2005 was the second largest ever. Corn price is projected to drop from a season average $2.06 per bushel in 2004-05 to $1.90 in 2005-06. Higher production costs, lower prices and reduced yields contribute to significant decline in net returns for corn in 2005-06.

"Declines outweigh government loan deficiency payments (LDP) and counter-cyclical payments (CCP)," Westhoff says.

Corn prices are projected at $2.10 in 2006-07 and $2.20 in 2007-08. Some soybean acreage is projected to shift to corn. While corn acreage falls slightly in 2006 because of higher production costs. In later years rising prices and increasing yields will encourage producers to shift acreage from other crops to corn.

The brightest spot in the baseline is demand for ethanol fuel made from corn. A new section of the baseline report was added for corn products.

"This 2006 baseline foresees faster growth in ethanol production than in the 2005 baseline," Westhoff says. "Higher petroleum prices and provisions of the Energy Policy Act of 2005 add to the growth."

The baseline projects 2.8 billion bushels of corn for ethanol by 2014, compared with 2 billion projected in 2005. Ethanol production alone exceeds levels required by new federal fuel mandates for use of biofuels.

At current trends, ethanol demand will exceed corn exports by market year 2007-08.

Several economists at a baseline review says FAPRI projections for ethanol use were too low, Westhoff says. Gross margins for ethanol plants are at record highs; however higher corn prices, lower gasoline prices and increased ethanol production could dampen returns.

Along with fuel, ethanol plants produce corn byproducts for livestock feed. That feed already exceeds use of wheat, sorghum, barley and oats combined.

There will be more cattle to eat byproducts, as the U.S. cattle herd expands, stimulated by higher beef prices since 2003. FAPRI projects a peak of over 103 million head by 2012.

"As beef supplies increase, prices will moderate," says Scott Brown, FAPRI livestock analyst. A 600-pound feeder calf that averaged $120 per hundredweight in 2005 is projected at $84 by 2012. Fed cattle in Nebraska are projected to drop from $87 per hundred in 2005 to $71 in 2012.

Pork prices remained near $50 per hundred in 2005, despite a fifth year of record production, Brown says. However, by 2007, as pork supplies grow faster and pork exports slow, hog prices are projected at $40 per hundred.

As higher corn prices depress pork profits, the sow herd will decline through the baseline period. But with rising productivity per sow, projected pork production continues to increase.

Broiler production grew at 3.5% each of the last two years with projected growth above 3% through 2008. During that time, both broiler and turkey prices are projected to decline from recent record highs.

Milk supplies will outpace demand for dairy products. High milk prices in 2004 and 2005 encouraged more production. As a result price projections drop from $15 per hundred received the last two years to $13.49 in 2006. Dairy cow numbers decline as production per cow increases, Brown says.

With increased meat production and uncertain meat exports, particularly in beef, future livestock prices depend increasingly on U.S. demand. Resumption of beef exports to Japan and possible avian flu are wild cards in meat price projections, Brown says.